With a string of new investments and acquisitions in the past year, Shell has quietly stepped up the pace of its transition from an oil and gas company into an energy company. “We are further along than people realize”, says Mark Gainsborough, Executive Vice-President of Shell New Energies, in an exclusive interview with Energy Post. According to Gainsborough, there is a “shift in thinking” within the company that is now irreversible. “People in Shell see a lot riding on the success of New Energies. And we are considered one of the most attractive units to work in. Anyone under the age of 35 wants to work for New Energies.”
How would you describe the standing of New Energies within Shell?
“Ours is one of the most closely watched units. It attracts tremendous interest, from the board, from investors, and also from employees. It is one of the most attractive units to work in. Anyone under the age of 35 wants to work in New Energies!”
What about people higher up in the organization?
“I know that in a skeptical world people sometimes doubt that an oil and gas company wants to grow in alternative energies, but I can assure you that everyone in the company wants us to succeed. We see our future as an energy company. We are aware that we need to change as the energy system is changing.”
Do you have specific targets that you have to meet?
“We do have some financial metrics for the next decade about what we would like to deliver. If we find opportunities that are commercially viable, we could spend $1 billion to $2 billion a year over the next few years on average. If we are successful in what we do, we can scale up spending, so we can grow the new businesses into material assets. In the long run this should lead to significant cash flows.”
Will you ever be able to make the same kind of return on investment in alternative energies than as in oil and gas?
“For new fuels we expect Downstream-like returns, in the high teens. For power, we believe we can achieve 8-12% equity returns with stable and rateable cash flows. Many alternative energies are still nascent with business models still being proven at a material scale. It can take a long time and a lot of active investors before you move into profit mode.”
But does Shell have the right skill sets and strengths to be successful in the electricity sector?
“I think people underestimate our strengths and heritage in this space. We don’t start from scratch. We have been the second biggest wholesale power trader in the U.S. for twenty years. We market power to quite a few customers around the world, we supply fuel to power generators, we have had renewable assets in the past. We have a lot of experience in solar power, in wind power. In offshore wind a lot of our experience is directly applicable. And we have a lot of experience with retail customers. We have more customers and more retail sites than any other oil company. We are further along than most people realize.”
We are further along than most people realize
Do you see New Energies staying an integrated part of Shell? Or do you think it could grow into a standalone business?
“Shell clearly wants renewable energy to become a central part of what we do. So we don’t see that we will spin this off as a standalone business. That’s partly because a lot of value for us comes from our ability to leverage the wider capacities of Shell. We can call on Shell’s resources, skills, knowledge. In some cases we also actually deploy renewable energy within Shell facilities, e.g. solar power panels in chemical facilities. That’s very useful for us to develop our know-how.”
What do you look for in startups? Sometimes you invest in them, sometimes you buy them. What is the thinking behind that?
“There are a lot of different motivations to buy or invest in startups. A lot of innovation comes from them. So they give insight into what is happening in new technologies and business models. Sometimes they help us get into different technologies or to create new value propositions. Sometimes we combine investment with a joint development agreement that lets us harness their skills. We can also be early customers sometimes. From a venture capital perspective it can be interesting if a company grows in value. I suspect that we will end up acquiring some companies we are investing in.”
Is it clear to you where the best opportunities lie? Or are you still in an exploratory phase?
“I think it is fair to say we are still exploring, learning through doing. We see a number of markets providing good opportunities and we are starting to develop those. But it is not easy to play in every market in the world. So we will make some choices about where we want to play in a more material way. In power we see Europe as an important market, and North America. In some markets we will deploy an integrated model – renewable energy, with trading and marketing to end customers. In markets that are less liberalized, like India and China, we may stick with power generation.”
Where does an initiative like Shell’s New Energy Challenge come in?
“For us the New Energy Challenge is a great way of bringing real, very early stage companies together and it gives us a chance to see some of those very early stage companies at first hand. For them it it’s also a huge step to get coaching from the people in Shell or from the people running the accelerator programs. That’s tremendously beneficial to them in addition to the sort of convertible loan that they get that helps them with their early stage funding.”
Do you see synergies between the new companies you are investing in?
“Yes, absolutely. Think of how First Utility, NewMotion and Sonnen could work together. NewMotion puts EV charging points in homes. If you have that, there is potential to combine that with battery storage. Sonnen is one of the leaders in residential battery storage – they are better than some other names in that space. You can then create a network of virtual power plants, let people sell power back to the grid, or even do peer-to-peer trading. Or they can be part of demand response schemes. This is where First Utility can make a difference. We are talking about the cutting edge of how energy will get used in the future. This is very different from the centralized model of the past. We are also very interested in the combination of distributed energy resources with mini-grids and storage. The whole storage space is super-interesting. And it’s not just about batteries. For example, we invested in Axiom Energy in the U.S., which uses refrigeration systems as storage with the help of smart software.”
So how long do you think it will take before New Energies becomes as big as existing divisions in Shell, such as refining or exploration and production?
“This will be a journey of several decades, to be sure. I know that there are some people who want us to go faster. But there are also investors who want us to go slower. We have to take a judgment about the right rate to invest. Shell has to remain a world-class investment opportunity. So I have to find world-class investment opportunities. If I do, I will get the money to grow further. That’s the reality of a commercial company.”
But you have no doubt you will stay on this course?
“We went through a big transition from being a predominantly oil company to now having a balance of oil and gas in our portfolio. The next step is to go to gas-and-renewables. We are up to that challenge. We want to be relevant as an energy company to the end of the century and beyond.”
The complete interview with Mark Gainsborough can be found on energypost.eu